CoPS/IMPACT Working Paper Number G-279

Title: A decomposition and microsimulation analysis of occupational wage growth in
Australia, 2010-2017

Author: Janine Dixon and N.H. Tran

Abstract

Dynamic historical and comparative static decomposition CGE simulations are a powerful
tool for understanding structural change and its impacts. In this paper, we examine the
impact on wages of three sets of structural drivers: macroeconomic factors, qualification
supply, and technical change.

To the CGE analysis, we add a microsimulation analysis. Microsimulation addresses a
shortcoming in CGE modelling, which is that the household sector is represented by one or
several representative agents. With the representative agent treatment, CGE modelling is
unable to capture all of the diversity in the household sector in relation to the levels
of income, sources of income, and composition of expenditure by different households.

Over the study period of 2010 to 2017, average growth in real wages in Australia was
weak. Growth in high-wage occupations was generally stronger than growth in low-wage
occupations, resulting in a widening gap between the wages of the highest- and
lowest-paid workers. Over the period, key results from our research indicate that:

(a) Macroeconomic factors played a role in determining overall wage growth, but did
not explain the disparity between wage growth at the occupational level;

(b) Strong growth in the supply of qualifications at the level of bachelor degree
level and above detracted from wage growth in the high-skill occupations;

(c) Skill-biased technical change in favour of the high-skill occupations led to
relatively strong growth in the wages of high-skill occupations, an effect that dominated
the results; and

(d) Relatively strong growth in the wages of high-skill occupations added
disproportionately to the incomes of high-income households and led to an increase in
household income disparities and an increase in the relative poverty rate. However, this
result did not take into account possible changes in occupation by households over the
study period. With the wages of low-skilled occupations falling further below average, a
change of occupation, rather than a pay-rise in their existing occupations, was a better
prospect for low-income households to avoid falling into absolute or relative
poverty.

The decomposition analysis could be extended to a broader analysis of structural
change in the Australian economy, and may be the subject of future research. The links
built for this analysis between CGE modelling and microsimulation also suggest scope for
future research.

An earlier version of results reported here was presented at the Melbourne Economic
Forum on December 12, 2017. We are grateful to members of the Forum including Peter
Dixon, James Giesecke, Craig Emerson and Mark Wooden for valuable feedback.